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The Evolving Gold Narrative: 2011 vs. 2016

By Sprott U.S. Media
4 years ago
13936 Views

September 7, 2016

Bill Gross just called out Janet Yellen as the penultimate market manipulator.

Gross,
former head of PIMCO and current manager of Janus funds, recently
echoed Rick Rule, assigning blame to the Fed for deferring short-term
pain at the expense of long time gain. Mr. Gross’s comments are timed as the Fed continues to debate whether to raise interest rates
after years of keeping them anchored in an effort to stimulate the
economy and generate inflation. Instead, Gross said, the Fed has merely
inflated asset prices while actually harming the economy.

But as this has been an ongoing narrative for gold investors since 2011, we asked Rick Rule what has changed in the gold story.

Rick
explains: “In 2011, there was an entire narrative around the gold
market, when gold was at $1,900, and that narrative was partly about
U.S. markets; that is, higher incomes in places like India and China
that had historic cultural affinity to gold. But, the other part of the
discussion was really about the ability of U.S. Treasury securities and
the U.S. dollar to retain the degree of hegemony as savings instruments
that they had always enjoyed. The narrative in 2011 was that U.S.
Federal Government on-balance sheet liabilities, at $16 trillion, were
unsustainable, and worse, the off-balance sheet liabilities of $55
trillion were similarly unsustainable (and those numbers didn’t include
state and local debt or pension obligations or stressed individual
corporate balance sheets).”

Today, on-balance sheet liabilities are no longer $16 trillion. They are estimated at $19 trillion.

And
investors somehow seem more sanguine at that higher level. Off-balance
sheet liabilities, similarly, have moved from $55 trillion to $90
trillion.

The
perception of sustainability is partly explained by the ongoing
strength of the US dollar, which was all too uncertain in 2011. Rick
explains, “I would suggest to you that is not a consequence of the
strength of the U.S. economy or our collective balance sheet, but rather
the weakness of the competition. I don’t think I have to recount the
difficulties that emerging and frontier markets have faced, or the
difficulties that Japan and Euro-zone face.”

In
terms of the macro case for gold, its market dominance has eroded. In
the 1980s, at the peak of that manic bull market, gold and gold related
equities enjoyed an 8% market share of investable assets among U.S.
savers and investors. The median and mean converge over the last three
decades at about 1.5%. The current percentage is 0.33%.

And
with national mouth-pieces like Bill Gross suddenly remembering the
benefits of gold and other tangible investments, will we see a reversion
to the mean? According
to Rick, “I’m not suggesting that it will immediately get back to 1.5%,
but even if we got back to half of mean, that would double demand for
gold and gold related equities in a market where the U.S. still counts
for 24% of the world’s investable assets.”

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